It’s been a busy, gratifying start to the new year as I’ve been sharing vAuto’s new Provision ProfitTime methodology and metric with dealers.

I’m encouraged by the fact that many dealers are asking about ProfitTime because they recognize that margin compression is a serious problem. They aren’t happy with the gross profits they’re getting in used vehicles, and they’re hungry for a better way.

The ProfitTime conversations and meetings have led me to an insight that, in some ways, seems a bit ironic—that the worst vehicles on dealers’ lots today represent the biggest opportunity for tomorrow.

Let me explain what I mean.

When I share ProfitTime, I’ll use the system to evaluate a dealer’s inventory based on the investment value, or profit potential, of each vehicle.

For dealer after dealer, and from one store to another, the ProfitTime analysis reveals a similar outcome: Roughly half of the vehicles in inventory (about 46 percent, on average) are classified as Bronze or distressed vehicles. (For those who don’t know, ProfitTime assigns an investment value score to each vehicle, and classifies them with precious metal designations, Platinum, Gold, Silver and Bronze.)

The Bronze vehicles are units that represent little, if any, meaningful return on your investment. Some of these vehicles have been in inventory nearly 60 days or longer; others entered your inventory in an investment-troubled position.

The ProfitTime analysis also exposes two unfortunate conditions that Bronze vehicles typically possess:

The Cost to Market ratio is too high. Generally, I see Cost to Market ratios running close to, and sometimes above, 100 percent with Bronze vehicles. This ratio means the costs to own, and keep, these vehicles is almost as much as the retail sales price dealers will get for the vehicle. In other words, there’s little, if any, margin for gross profit. Yet, the vehicles remain in inventory, available for retail sale, day after day.

The Price to Market ratio is too high. The Bronze vehicles, despite their distressed investment position, are often priced at or above a 100 percent Price to Market ratio. In effect, this means dealers are attempting to retail these vehicles for all the money, even though buyers seem to be saying they’re asking too much.

The widespread nature of these conditions leads me to believe that dealers need to change the way they think about and manage their Bronze vehicles.

Instead of regarding them as problem cars you hope will go away, I think dealers should consider Bronze vehicles as a blessing—an opportunity-in-waiting, if you will, to drive additional retail volume and improve used vehicle profitability.

I’ve come to this belief based on five factors:

First, if dealers retailed Bronze vehicles more quickly, they’d naturally add momentum to monthly volumes. The key is to recognize how to retail these vehicles in a more timely manner. Hint: The fix often starts with far more market-realistic prices.

Second, if dealers retailed Bronze vehicles more quickly, front-end gross profit averages may take a dip as dealers clear out the initial batch of the most-aged and -distressed units. But over time, and with more consistently diligent Bronze vehicle management, front-end gross profits will grow as you retail these vehicles before they become break-even or money-losing deals.

Fourth, if dealers retailed Bronze vehicles more quickly, they’d be less shy about getting the gross profit they deserve on the Platinum and Gold vehicles that merit this expectation. This benefit, when coupled with better grosses on Bronze vehicles, creates a path for you to push back against margin compression and avoid making it worse at your dealership.

Fifth, and perhaps best of all, if dealers retailed Bronze vehicles more quickly, they would seize an opportunity to grow used vehicle sales and profits without investing additional capital. The money you’d need to invest in this opportunity is already on the ground; it’s just not moving as quickly to produce the return it should today.

As I’ve talked to dealers about this ProfitTime-driven shift in thinking and operational management, it’s become clear that it doesn’t appeal to every dealer, and the adjustment may prove difficult, even for those who are fully committed to the change.

This observation occurred to me after the third or fourth time I heard this comment, “But, Dale, some of these Bronze cars just take longer to sell.”

When I hear this, I’ll say, “Of course your Bronze vehicles take longer to sell. That’s what happens when you’re not willing to face the music.”

P.S. Going to NADA? I’d welcome the chance to discuss how your Bronze vehicles represent a great opportunity. I’ll be at the vAuto booth (#1620S). I look forward to seeing you there.

We have a tendency as dealers to think of our new and used vehicle inventories as large, singular investments.

Together, the new and used vehicle inventory investment at many dealerships ranges between $7 million and $10 million—a sum that represents a significant amount of skin in the game for a typical dealer.

But while many dealers are readily aware of how much they’ve invested in their inventories, it’s become clear that we need a higher level of attention and focus on the overall health of each vehicle as an investment and its ability to drive a meaningful return.

I’ve come to this conclusion after spending much of the past year trying to figure out why as much as 50 percent of used vehicle inventories, and 30 percent of new vehicle inventories, at dealerships across the country represent distressed investments.

By distressed, I mean investments that have lingered too long, failing to find a retail buyer and, over time, losing their ability to deliver a profit-positive return.

The ubiquity of this inventory investment inefficiency leaves me troubled.

Dealers are entering a year where virtually all signs suggest that it will be more difficult and challenging for you to achieve the new and used vehicle sales volumes goals you expect for your businesses.

I haven’t talked to any dealers who say, “We’re planning to do worse in 2019.” Most, in fact, aim to grow retail sales volumes, particularly in used vehicles, and strive to bring more customers back to their service departments.

These growth-minded goals are well and good.

But I would submit that the retail sales goals, and the meaningful returns they should represent, won’t arrive unless and until dealers address their current inventory investment inefficiencies.

After all, the share of effectively “dead stock” in dealers’ new and used vehicle inventories drags down your ability to grow sales volumes and, in many cases, makes margin compression even worse.

For all these reasons, I’ve been encouraging dealers to apply a more investment-minded approach to their inventory management. This approach requires at least three fundamental shifts in thinking:

1. A sharper focus on the investment value of each vehicle. There’s a long-standing saying, “The car is the star.” The saying generally holds true, except when it doesn’t. Consider the stars in a clear night sky. Some shine brighter than others. The same is true for new and used vehicles. The star quality, or investment value, of each vehicle varies. The variation owes to the realities of your market. Some cars have an innately higher investment value, or level of brightness, than others.

The key is to know, from the moment you appraise a used vehicle or configure a factory order, whether a specific vehicle will offer a meaningful investment return or not. Thankfully, today’s technologies and tools provide this critical insight.

2. Managing each vehicle to achieve its unique investment potential. Once dealers and managers understand each vehicle’s investment value, it’s critical to make decisions that reflect its investment return potential as a retail unit.

It’s easy to tell when dealers and managers don’t think this way. You see the evidence in standard mark-ups and price points applied to every vehicle, irrespective of the unit’s individual standing in the market or inventory.

Unfortunately, today’s market is too efficient, too margin-compressed and too transparent to support anything less than precise, car-specific decisions that align with a vehicle’s investment value. If the reality were different, we wouldn’t see such an out-size share of distressed vehicles in dealer inventories today.

I should note that managing each vehicle’s investment value isn’t always pretty. Some vehicles are troubled investments from Day 1, and may not hold any retail profit potential or even represent a loss. I encourage dealers who struggle with these scenarios to consider the parallels between auto retailing and marriage—if you’re in it for a successful long haul, you learn to accept what comes, for better or worse.

3. Avoid hoping for a better investment outcome. When I ask dealers why they’re still carrying their most investment-distressed inventory, the answers typically boil down to something like, “we were hoping it would sell and we’d make some money.”

We all know that hope isn’t a strategy, and it’s also a hard habit to break. But breaking the habit is easier when you have a clear-eyed view of each vehicle’s investment potential, and use it to avoid letting yourself believe you can engineer a more profit-positive outcome than either the vehicle, or your market, will allow.

The results I’ve seen from dealers who have applied an investment value management mindset to their new and used vehicle inventories are encouraging. In most cases, they’ve reduced the share of distressed inventory, turning these units faster to increase volume and total gross. At the same time, the dealers are more effectively managing their best investments, and maximizing the gross profit these units should rightfully bring.

These are all positive outcomes that lead me to believe that managing investment value-based inventory management offers a better way forward for dealers to both mitigate margin compression and meet their 2019 profit and sales volume objectives.

P.S. I will be attending the upcoming NADA convention in San Francisco, spending the bulk of my time at the vAuto booth (#1620S). I’d welcome the opportunity to discuss how investment value-based inventory management can help you achieve your goals for the coming year.

I’ve spent the past three weeks traveling across the country to talk to dealers about Provision ProfitTime, a new metric and methodology we’ve introduced to help dealers better manage the effects of margin compression in used vehicles.

The discussions and meetings have been eye-opening, for both the dealers and me.

For dealers, ProfitTime initially stirs the emotions. The most profound reaction is disbelief, particularly from dealers who have invested their hearts and souls in Velocity principles. There’ve been some “Oh, sxxt” and “WTF?” moments, followed by a palpable sense of relief as dealers see the benefits of understanding, and managing to, each used vehicle’s investment value.

For me, the ProfitTime discussions and travels have brought me back to the earliest days of vAuto, when I was the only guy suggesting a different way forward for managing used vehicles. In some ways, ProfitTime feels like we’ve discovered a hole in the used vehicle universe, and figured out a way to fix it. I’ve also come to the realization that I’ll be a busy guy in the months ahead as ProfitTime goes to market.

I’ve met with enough dealers to understand the common, most-pressing questions ProfitTime presents. I thought I would share five of them here, with answers:

1. Does ProfitTime invalidate Velocity? The answer is an emphatic, “No.” ProfitTime is a path beyond Velocity, where your retailing strategy is based not on the number of days you hold a vehicle, but rather the investment value or profit potential each vehicle holds. Velocity metrics and principles help you discern a vehicle’s investment value, but they don’t precisely measure it for you like ProfitTime. I would also add that ProfitTime and Velocity are both rooted in my belief that while used vehicle management is, and probably always will be, a blend of art and science, the science itself is getting better all the time.

2. Will the transition to ProfitTime be as painful as the switch to Velocity? I wish I had a crystal ball to know the answer for certain. On one hand, dealers typically had a larger share of aged/distressed inventory when they adopted Velocity compared to today. At the same time, while the share of investment-distressed inventory in dealerships today might be smaller, the average cost per car is significantly higher. Ultimately, the correct adoption of ProfitTime will require that dealers reckon with their worst used vehicle investments first. This reckoning represents the short-term financial pain that will precede the long-term gain. I would also say that the degree of any associated pain will ultimately depend on how well dealers have aligned and calibrated their used vehicle age management and market pricing strategies to date.

3. Why do I have so many Bronze vehicles in my inventory? A quick point of context: In my discussions with dealers, I’ll show them their inventories through the ProfitTime lens. Invariably, we’ll find that almost half of their vehicles carry the Bronze designation in ProfitTime, which means these vehicles are the most distressed from an investment perspective. These vehicles also tend to have asking prices, or Price to Market ratios, higher than the individual vehicle’s investment value suggest they should command. These dynamics are nearly universal, which suggests two important take-aways:

First, the share of Bronze vehicles is a market condition. It’s perhaps the most compelling sign of how much margin compression and a more efficient, transparent market have combined to fundamentally alter the financial foundations of the used vehicle business. Front-end margins on some vehicles, particularly the bread-and-butter volume cars, are simply smaller today than they used to be.

Second, if these vehicles have less investment potential from the get-go, there’s less margin for error when it comes to buying and pricing them correctly. As I examine Bronze vehicles more closely with dealers, we typically see where some of the art of used vehicle management could be sharpened.

4. How does ProfitTime calculate each vehicle’s investment value? ProfitTime is built on an algorithm that draws from three principal data sets for each vehicle—the Like-Mine Market Days Supply, adjusted Cost to Market and recent sales volume. The resulting calculation then scores vehicles on a 1-12 scale, and assigns a Platinum, Gold, Silver or Bronze precious metal category to each vehicle. We’ve tested and re-tested the algorithm across millions of vehicles in dealer inventories to know, with utmost accuracy and confidence, that the ProfitTime valuation is sound.

5. Where will ProfitTime have the most profound impact in my used vehicle department? I believe ProfitTime will bring the most profound clarity and impact to used vehicle appraising and pricing decisions. When you examine a dealer’s inventory with ProfitTime, you’ll see what I call a pricing “inversion,” wherein the Platinum vehicles, or best investments, are priced lower than all the other vehicles. Meanwhile, Bronze vehicles, which represent the worst investments, are priced the most proudly. This condition is the direct result, I believe, of a lack of true investment value insight when appraising and pricing decisions are made. If we knew, for example, that a vehicle was a low-scoring Bronze vehicle at the time of an initial appraisal, I believe dealers and managers would be less inclined to price the vehicle, even though it’s “fresh,” at a 100 percent or greater Price to Market ratio.

As I discuss ProfitTime with dealers, many begin to see how the metric and methodology will help them improve sales volume, inventory turn and total gross profit in ways that weren’t possible before. The dealers also recognize that they’ve got some work to do with rethinking their management processes and retraining their teams.

I’ll be keeping close tabs on their ProfitTime progress, and relaying what I learn here. Stay tuned!

I’m excited to take part in an Automotive News webinar at 1 p.m. CST tomorrow to share vAuto’s latest innovation, our Provision ProfitTime metric and methodology. I’ll be joined by my ProfitTime co-creator, Chris Stutsman, who serves as vAuto’s director of innovation. Our goal will be to help dealers gain a better understanding of […]

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Dale Pollak believes the car business is at a critical crossroads. Like I See It offers a unique perspective and practical solutions to help dealers, OEMs and solutions providers ensure a viable and profitable future.